AI Adoption and Geopolitical Shifts Influences Flows of Sovereign Wealth Fund Capital
Posted on 05/21/2024
As geopolitical structures somewhat realign and inflation remains a sticky concern for sovereign investors, the strategies of these official institutions are shifting. As some sovereign wealth funds slow down financial flows into China due to heightened tensions with the United States, they are finding opportunities within India, especially in the areas of consumer finance, consumer services, education, real estate, and infrastructure. Sino-U.S. relations remain fractured, spilling into where and how public funds can invest into China. While these diplomatic bumps persist, India has attracted both SWF and public pension fund capital at greater amounts and frequencies. In fact, some of these public asset owners have closed offices in China or reduced headcount, while opening up footholds in Mumbai. The Middle East region also sees India as both an export market, but also a destination for capital investment. In October 2023, the United Arab Emirates declared its intention to spend US$75 billion in India over a period of time. Furthermore, Saudi Arabia established a US$ 100 billion investment objective toward India without a defined period. One recent example, in 2024, Goldman Sachs and Mubadala signed a US$ 1 billion private credit partnership to co-invest in the Asia-Pacific region, with a particular focus on India, the institutions said in a joint statement. The separately managed account, termed the “Partnership,” will be managed by Private Credit at Goldman Sachs Alternatives, with a staff based on the ground in various markets across the region. It will invest the long-term capital in “high quality companies … across the private credit spectrum” across a number of Asia-Pacific markets. Asian sovereign funds like Singapore’s GIC Private Limited have dabbled in both public and private markets in the subcontinent. For example, in 2024, GIC bought Rs 5747.04 crore worth of stake in Data Infrastructure Trust. GIC, through its subsidiary, Anahera Investment PTE acquired 37,44,00,000 shares at Rs 153.5 per share in the Infrastructure Investment Trust (InvIT).
Direct Investments by Sovereign Wealth Funds in India
| Year | Direct Investments in USD | Observations |
|---|---|---|
| 2023 | $7,568,444,810 | 40 |
| 2022 | $6,846,351,876 | 57 |
| 2021 | $4,300,977,147 | 79 |
Source: SWFI.com. Includes open market transactions.
Touching last on geopolitics and war. Some sovereign funds have pulled back more investments into Israel. Russia faced asset freezes and investor pullbacks since the 2022 invasion of Ukraine. Ireland Strategic Investment Fund (ISIF) has been directed by the country’s National Treasury Management Agency (NTMA) to sell positions in six companies based in Israel. Over US$ 3 million in investments will be liquidated. Companies on the list include: Bank Hapoalim, Bank Leumi-le Israel, Israel Discount Bank, Mizrahi Tefahot Bank Ltd., First International Bank, and grocer Rami Levi CN Stores. Michael McGrath, Minister of Finance said the divestment was due to “activities in the occupied Palestinian Territory.”
On May 20, 2024, the International Criminal Court’s prosecutor Karim Khan accused Israeli Prime Minister Benjamin Netanyahu and Hamas leader Yahya Sinwar, as well as others, of alleged war crimes. The prosecutor issued arrest warrants for them. While France and Belgium agreed with the court as treaty signers, U.S. President Joe Biden denounced the chief prosecutor at the ICC.
Norway’s massive US$ 1.6 trillion sovereign wealth fund – Norway Government Pension Fund Global – owns 1.5% of the world’s listed shares across 8,800 companies. The wealth fund’s ethics council is investigating companies and their participation in the war in Gaza. Days ago, the ethics council decided to exclude Adani Ports & Special Economic Zone Ltd. from its portfolio, citing “unacceptable” risks that the company is tied to human rights violations in war and conflict zones. The issue is specifically tied to a port terminal in Myanmar. The wealth fund added U.S.-based L3Harris Technologies Inc., which develops components for nuclear weapons to the ban list. Finally, the council added China’s Weichai Power Co. to the exclusion list due to concerns of the company involved in the sale of military equipment to Russia and Belarus. At the close of 2022, Norway’s GPFG owned 0.46% of the Weichai Power’s shares, worth NOK 553 million at the time. Weichai Power produces engines and power trains for heavy vehicles.
AI and Private Credit
Focusing on direct investments, sovereign wealth funds have recently leaped from the crypto-biotech bandwagons derived by the pandemic/money printing periods toward artificial intelligence and automation. This is inline with the thesis that many Wall Street analysts expect AI spending to remain strong, and foresee a bottoming in end markets like personal computers and smartphones. Direct startup investors on the SWF side such as the Qatar Investment Authority (QIA), Temasek Holdings, Mubadala Investment Company, and Saudi Arabia’s Public Investment Fund (PIF) have taken bets in companies engaged in machine-learning and automation at a greater pace than from five years ago. Some of these majestic pools of capital have formed units, groups, and even corporations to target these emerging tech companies. For example, in 2022, Saudi Arabia’s Public Investment Fund (PIF) formed the Saudi Company for Artificial Intelligence (SCAI) in June 2021. In 2022, SCAI started its operations. SCAI aims to grow and develop artificial intelligence and emerging technologies industries in the Kingdom.
SCAI’s chairman, Dr. Abdullah bin Sharaf Alghamdi, said back in 2022, “As PIF’s arm in the AI and emerging technologies sector, the company will develop local capability, cutting edge technology, and strategic partnerships to support creating Saudi-owned solutions in the AI ecosystem.”
Direct investments are one path. These sovereign investors are once-again open to venture capital funds. Sovereign investors like GIC and Temasek Holdings are looking at venture funds that are targeting companies that utilize AI technology.
India allocations and AI are some clear themes for sovereign investors for 2023 and 2024. Another dimension that is a longer trend stemming from the global financial crisis of 2008 is private credit. This recalibration of markets prompted by multiple liquid pools of public fund capital has helped this asset class flourish. The Korea Investment Corporation (KIC) is even analyzing deals for direct lending into companies. KIC has around 22% allocated to alternative assets out of a number just shy of US$ 200 billion in assets under management. In conclusion, sovereign investors help reinforce global themes as a multiplier effect.